Published 4:00 am, Wednesday, May 26, 1999

1999-05-26 04:00:00 PDT WIZARDLAND -- In one of the largest securities- fraud cases ever to strike Silicon Valley, Informix Corp. of Menlo Park and its former auditors and executives have tentatively agreed to pay $143 million for allegedly lying about company revenues and trading on inside information.

Although the company denies settling the case, sources close to the litigation say the troubled maker of database software last week reached a handshake deal to compensate investors who were stockholders from early 1995 to late 1997, when Informix allegedly padded revenues with hundreds of millions of dollars of phantom sales.

Several top executives, including former Chief Executive Officer Phillip E. White, and the accounting firm Ernst & Young owe unspecified shares of the settlement that sources say will be payable in cash and company stock.

The settlement is a significant blow for Informix, which earned $57.7 million on sales of $735 million last year. It is also a staggering amount in an industry that is accustomed to settling securities-fraud class actions for an average of about $10 million.

"Bad facts make for big settlements," said Professor Joseph Grundfest, a securities-law expert at Stanford Law School. "It would certainly be one of the most significant settlements ever, because of its size and the underlying allegations."

The allegations first emerged in dozens of lawsuits filed after the company announced in April 1997 that it would lose money in the first quarter of that year. Executives blamed the losses on unexpectedly slow sales of its touted new technology, a database that could store any kind of information, notably graphics, rather than just text and numbers.

But plaintiffs' lawyers contended that top executives had been lying about revenues for years by claiming to have sold software that was merely shipped to customers temporarily and returned to Informix the next financial quarter.

The effect of the allegedly phony sales, the attorneys argued, was to increase Informix's stock price so that the executives could sell their shares at an exorbitant profit before the truth became public.

Federal securities laws bar "insiders" from selling stock without telling the public about important information, such as the fact that revenues have been falsified.

White and former Informix Chief Financial Officer Howard Graham sold more than $15 million worth of stock before the company announced it was losing money.

Several months later, the federal Securities and Exchange Commission questioned Informix about recording revenue for unshipped products and other accounting irregularities. Finally, in November 1997, the company was forced to restate its financial results for the previous 14 quarters.

The restatements wiped out almost $240 million in profits, sent the company's stock price plummeting and attracted even more lawsuits from shareholders.

The lawsuits, which were eventually combined into a federal case and a state case, contended that Informix had entered into side agreements in which it promised customers that they would not have to pay for products the company shipped to them or could return the products that the company was booking as sold.

The suits also claimed that Informix shipped products during one financial quarter but booked the shipments as revenue for the previous quarter. Company employees routinely called these transactions "Phil deals" -- referring to company president White -- and closing the last fiscal quarter on "December the 45th."

"Due to this fraudulent accounting," said the federal complaint, "Informix was able to report the revenue growth necessary to support its stock price, even though actual demand for Informix's products was not growing as represented to the market."

While these accounting practices were taking place, several top executives sold almost all of their stock, the suits claim. The complaints contended that White sold 97 percent of his shares, Graham sold 98 percent of his shares and former Vice President Ronald Alvarez sold 100 percent of his shares.

The complaints also claimed that Ernst & Young, the company's auditors at the time, knew of the accounting irregularities but certified that the company's fiscal practices conformed to generally accepted accounting standards. The auditors also failed to force the company to disclose the irregularities publicly, the complaints charge.

Ernst & Young did not return calls yesterday seeking comment on the case or the tentative settlement. Attorneys for the individual defendants declined to comment.